USD 4.5. billion WHAT IS A DATA CENTRE? USD 2.2. Functions of Data Centre. Storage. Organise. Process. Disseminate. billion

Transcription

1 DATA CENTRES An emerging real estate asset class In the dynamic world of business, companies and institutes are continuously looking for cutting down cost and managing risk. One such cost is the costs incurred to store and manage data! During the inception of Information Technology, data was stored at a company level in a basic server. However, with the increasing amount of data, the demand for data INTRODUCTION storage and its management increased, which consequently led to the increased cost and complexity of servers. Now, businesses these days are looking to cut down these cost and transfer the data risk to data service providers that maintain data centres. These data centres carry comprehensive functions pertaining to the data. Owing to their increasing demand, these data centres provide lucrative opportunities to investors looking for exuberant returns. Also, many data centre structure products such as Data Centre REITs are traded publicly across various markets across the globe.

2 Storage WHAT IS A DATA CENTRE? Organise Process Functions of Data Centre Disseminate A data centre is a facility department that holds a holistic approach towards data. The processes functional coherently and according to the specific needs of the business through business specific applications, software and services. To seamlessly and smartly carry out various activities imperative for a business, data centres require extensive IT (Information Technology) infrastructure. These IT infrastructures commonly include servers, firewalls, storage systems and various other IT components. In order for these IT equipments to work in congruence with each other they require uninterrupted power supply, backup power generators and proper HVAC (Heating, Ventilation, and Air Conditioning) system in place. A data centre is a coherent integration of technology and real estate. Traditionally, businesses used to store data to perform nominal support function in form of basic servers. However, due to rapid generation of data and complexity in storage, the organic demand for storage and consequently for managed servers has been increasing at a considerable rate. Accordingly, these managed servers led to the advancement of data centre as a business model and investment opportunity for investors with moderate to high risk appetite. Data centre market size in India 2015 USD 2.2 billion 2018 USD 4.5 billion Source: Internet and Mobile Association of India

3 TYPES OF DATA CENTRES Data centre services are used by every company! However, the extent of their usage differs and it generally differs on the basis of size and business operation. Data centres are divided into captive and hosting models. Captive models are data centres specifically designed to meet the needs of a business or enterprise, not shared with other eternal organizations. On the other hand, the hosting or third party data centre provides shared services of data management to various organizations. Data centre services are imperative for companies that are looking for cutting down their operating cost, streamlining their operations, looking to expand with constrained IT infrastructure budget and ultimately for companies that want to focus their efforts and investment in primary business area. For investors, the current market with low interest rate is suitable, as the data centre asset cycle appears to have just started, paving way for considerable investment, development and opportunities in it. Types of Data Centre Landlord model Investor or developer provides basic facilities such as space and/or power. Tenants set-up their own servers, facilities and staff as per their requirements. Risk of technological obsolescence and operations is with the tenants. Co-location model Investor/developer provides Data centre market size in India additional facilities eg. engineering services, basic infrastructure facilities, network services, power and backup, etc. Tenants pay the rent and set-up their own servers. The operational risk is with the developer and technological obsolescence is shared between developer and tenant. Managed hosting model 2015 Here, the developers or investors provide holistic data centre services to the tenants. Tenant pays a billion premium on the rent to the developer or investor for carrying the risk of operations and technological obsolescence. These sub-classes are designed for investors with varying risk exposure. Investors who are conservative about data centres may opt for landlord model, while investors with considerable risk appetite may opt for co-location and managed hosting model. As per the current market dynamics, demand for co-location model is on the rise. According to a report by US based research firm Orbis Research, the Global Data Center Colocation Market size was of value $29.83 billion in It is projected to reach a value of $76.37 billion till Source: Internet and Mobile Association of India

4 KEY DEMAND DRIVERS Technological advances in big data, artificial intelligence, internet of things and digitalization through government s digital India campaign is likely to generate enormous data centre traffic in coming years. Hence, data centre becomes imperative in capturing these data. Businesses are trying to transfer the capital expenditure of business to operating expenditure. Hence, marking the importance and demand of third party data centre service provider. Data Centre REITs have multi-fold advantages for investors and developers. In terms of return, the data centre REITs in USA have given a whopping 28.43% return in Business organisations these days are moving towards cloud computing. Cloud computing has impacted the location of data centre making it irrelevant. This can lead to the demand for data centres in Tier 2, Tier 3 and peripheral areas of the city, where the land cost is low.

5 PERFORMANCE OF DATA CENTRE REIT IN US VS. OTHER US REITS US REIT market is one of the most established markets across the globe and hence, its approach is followed by several countries in defining their REIT models. Though, the US REIT performance trends cannot be exemplified for the entire world, it can give a fair idea of returns with respect to various real estate asset classes. Performance of data centre REIT in US vs. Other asset class Source - National Association of Real Estate Investment Trusts

6 RISKS OF DATA CENTRE ASSET CLASS Development of data centre is capital-intensive and complex, as the infrastructure investment for data centres is substantial. Also, experience and knowledge required for designing a data centre is significant. The time required to break-even or get positive cash flow are generally high. Data centre being a real estate is illiquid in nature. Hence, making it difficult to sell off or price during certain times. Operational costs of data centres are also high, as proper HVAC system requires continuous maintenance and electricity. One of the major risks of data centres are technological obsolescence. With evolving technology, facilities at the data centres may become obsolete and the high cost associated with their development might go down the drain. Furthermore, space required for data centre will reduce as and when the speed of technology is more than the speed of data generation. Increasing importance of cloud computing may result in the irrelevance of data centre location. Hence, making data centre non-location specific. Disasters and cyber crimes are continuous threats impending on data centre management.

7 KEY INVESTMENT GUIDELINES Design and architecture of a data centre is critical for the sustainability and success of data centre. Robust design of a data centre is more likely to attract tenant as well as investors. Investors look at the potential growth of the asset, while committing an investment. Data centre should have an expansion opportunity in place. The expansion can be in terms of space for incorporating more tenants, up-gradation of existing facilities and innovation of IT infrastructure. Reinvestment should be made in the form of these expansions to enhance the quality of the asset. Data centre s operating expense is a function of its location. Apart from the continuous supply of electricity, the cost of electricity, tax incentive, cost associated with skilled and unskilled labours are location specific factors that impact the profitability of a data centre. The quality of asset as well as the existing tenant should be looked upon for the marketability of the data centre. The time period of the existing lease with tenants is also essential. Fundamental analysis of the macro-economic factors pertaining to the demand of data should be diligently done to rationalise the decision of investment in data centre.

8 CONCLUSION! With the complexity in IT infrastructure, businesses are shifting their IT operations to cloud services, leading to the emergence of Infrastructure-as-a-Service (IaaS) and other cloud models. These outsourcing services will demand data centre. However, the development of data centre is time consuming and sometimes cumbersome, so only specialized players with the knowledge and investment power combined will be venturing into data centres. India is yet to list its first REIT, but data centre REITs can provide return and risk characteristics of data centre to retail investors. Owing to the aforementioned demand and risk factors, data centre is expected to grow as an asset in India and worldwide. I don't need a hard disk in my computer if I can get to the server faster... carrying around these non-connected computers is byzantine by comparison. - Steve Jobs

9 Contact Us Rohan Masurkar Associate Manager, HDFC Realty Sruthi Kailas 15th Anniversary Treats Associate Manager, HDFC Realty Bhavya Gupta Sr. Executive, HDFC Realty Follow Us Our Apps Market Watch by HDFC Realty A free knowledge sharing app which updates you on latest happenings in the Real Estate Sector. CLICK HERE TO DOWNLOAD Disclaimer The information contained in this article has been gathered from various sources published in different domains. HDFC Realty Limited ( HRL ) has reproduced the articles verbatim. HRL does not vouch for the accuracy of the information and is not responsible for decisions that may be taken on the basis of information provided in this article. No reliance should be placed for any purpose whatsoever on the information contained in this document or on its completeness. HRL does not accept any responsibility for any error whether caused by negligence or otherwise or for any loss or damage incurred by any one in reliance on anything set out in this article. HRL disclaims all liability, responsibility and negligence for direct and indirect loss or damage suffered by any person arising from the use of information presented in this document. Nothing in this Article is intended to constitute legal, tax, securities or investment advice or opinion regarding the appropriateness of any content and information hereinabove. The use of any information set out in this article is entirely at the addressee s own risk. The information contained herein 123 is intended Anywhere solely St., Any for City, the State, private Country usage of the addressee(s). (123)